Asset Protection Strategies

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Before we begin to dig in, it is important to cover some ground-level fundamentals when it comes to asset protection planning:     

1. No matter who you are or what you do, everyone has some risk of being personally involved in a lawsuit which may result in a personal legal judgment.     

2. Professionals are at increased risk of personal liability (doctors, dentists, chiropractors, lawyers, accountants, engineers, architects, real estate professionals, etc. – if you are a professional, you especially need to know and practice sound asset protection planning principles)     

3. It is never too soon to start your personal asset protection planning – in fact the sooner you do the planning, the more sound your protection will be. These may sound like obvious statements, but we so often hear people say things like: "I don’t think I have that much risk," "if someone does come after me, I’ll just transfer all of my assets to my mom’s name and my stuff will be protected," "I’m not that wealthy so I don’t know if I have enough assets to need to do any asset protection planning," or "I’ve got insurance, so I’m covered." All of these types of thinking are mistaken. 



In addition, there are a number very common misperceptions about personal asset protection that are important to dispel:     

1) "I have a corporation (or an LLC or other business entity), so I already have asset protection." Business planning/entity structure alone will not protect your personal assets. LLCs and other business entities can play an important part of your personal asset protection plan, but having an LLC or Corporation that you do business with, is not personal asset protection planning.     

2) "I have a Living Trust, so my assets are protected." A Revocable Living Trust will not protect your assets. (Living Trusts and Wills are great estate planning tools but they do not protect your personal assets from potential judgment creditors, bankruptcy, etc.)     

3) "I have put all of my assets into a corporation, so I am protected." Putting your personal assets into a corporation will not necessarily protect those assets from loss to personal judgment creditors (although the State of Nevada has recently added the charging order protection feature to corporations with between 2 and 75 shareholders - Nevada is the only state that offers this protection of Corporate shares from personal judgement creditors).     

4) "I can transfer my assets to protect them if I am sued." Transferring assets or setting up the protective structure after the threat has arisen may not protect the assets. Preplanning before the issue arises is critical.     

5) "I can protect my real estate properties by putting them into a Land Trust." A properly devised Land Trust can protect assets that are held in the Trust. However, generally, the way most Land Trusts are set up, they will not provide actual protection.     

6) "If I put all of my assets in my wife’s or in my brother’s name, I don’t have to worry, because everything is protected."  



There are a number of devices that are commonly used for asset protection.  Of course when talking about asset protection, there are essentially three sides to that picture:  (1)  Personal Asset Protection - which is protecting personal and business assets from the risk of loss to future personal judgment creditors; (2) Personal Protection From Business Liabilities; and (3) Business Risk Minimization - which is minimizing business assets from the exposure that the business has to potential business judgment creditors.   Let's start first with Personal Asset Protection Concepts and Strategies.   



A.  Using Corporations to Protect Personal Assets

While Corporations can be useful tools for Business use, Corporations are generally not great vehicles for Personal Asset Protection.  The reason why you generally shouldn't use a Corporation to Protect Personal Assets is this: if a person gets sued and ends up with a judgment being entered against them, the Judgment Creditor (the person or entity that has the money judgment entered in their favor) can then execute against any non-exempt assets that are owned by the judgment debtor (the person who owes the judgment to the judgment creditor).  If you have a Corporation, the way that you "own" the Corporation is through your stock ownership.  The personal stock holdings in a Corporation are generally treated as an asset that the Judgment Creditor can seize through a Writ of Execution.  If the Judgment Creditor takes the Stock in your Corporation, the Judgment Creditor acquires all of the Shareholder's rights in that Corporation.  If you were the Majority Shareholder in the Corporation and the Corporation owns assets, the Judgment Creditor can just vote to sell off the assets of the Corporation, then take the profit from the sale as a dividend. You've then lost, not only your Stock Ownership, but, more importantly, whatever the Corporation owned has been lost to the Judgment Creditor and you are now out in the cold.  

Because of the "seizability" of the Corporate Stock by a Judgment Creditor, the Corporation is generally a bad idea for Personal Asset Protection planning.  [Note that the State of Nevada has recently passed a law that extends Charging Order Protection to Corporations with at least 2 and not more than 100 shareholders.  (NRS 78.746).  But, so far, Nevada is the only state that offers this "back-end" protection for Corporations. Charging Order Protection and what that means shall be discussed in more detail hereinafter.]  

B.  Using An LLC to Protect Personal Assets

 A Limited Liability Company (LLC) can offer some good Personal Asset Protection from the "back end".  Again, when we are talking about "back-end" protection, we are talking about the protection of your equity ownership interest in the LLC (called a "Membership Interest" - which is essentially the same as being a Stockholder in a Corporation) and the protection against a Judgment Creditor being able to get at the assets of the LLC.  

Just how strong the LLC's back-end protection is depends on the jurisdiction of the LLC. Nevada, in particular, offers the best LLC back-end protection, because the Nevada Statute specifies that the Charging Order is the exclusive remedy of a Judgment Creditor - and that remedy in Nevada is essentially a sit-and-wait-and-hope-the-LLC-is-dumb-enough-to-make-a-distribution-remedy.  Specifically, the Judgment Creditor of a Nevada LLC member cannot foreclose the Charging Order (which is essentially a lien) or exercise any other remedy against the LLC or the membership interests. The Judgment Creditor does not cede to any rights of the LLC member other than the right to receive the distributions made from the LLC when, and if, a distribution is made to the member that is the Judgment Debtor.  The Judgment Creditor cannot force any distribution of profits. Hence, if no distribution is made, the Judgement Creditor receives nothing.  The members and/or managers of the LLC can stay in control of when distributions are made (be careful to pick a good jurisdiction like Nevada for your LLC formation, because in some states where the Charging Order is not the exclusive remedy, they door may be open to foreclose the lien/charging order or to exercise some other remedy).  

Because the Charging Order gives the Judgment Creditor the right to receive the distribution of profits made to the Judgment Debtor member of LLC when such distributions are made, the IRS has taken the position that the Judgment Creditor with a Charging Order has become the financial member of the LLC.  The LLC, by default, is a "flow-through" tax entity (net profits and losses "flow-through" to the members and are attributed to the LLC members, regardless of whether or not any actual profit distributions are made).  What this means for the Judgment Creditor is that, if there is a net profit made in the LLC, the Judgment Creditor that has a Charging Order against an LLC member's membership interest may end up pay taxes on profits that the Judgment Creditor will likely never see (IRS Revenue Ruling 77-137).  Therefore, the there is a disincentive for the Judgment Creditor to want to get a Charging Order.  Which translates into protection from liens against your right as a member of the LLC to receive distributions of profits from the LLC.  (this is commonly referred to as the "K-O by the K-1") 

The "good" of the LLC back-end protection is that Judgment Creditors can't seize the membership interest in the LLC.  The Judgment Creditor is also prevented from forcing or taking the profit distributions, foreclosing against the lien (explicitly so in Nevada), voting the LLC member's voting interests in the LLC, or from exercising any other remedy against the membership interest.  The Judgment Creditor is also prevented from getting into the LLC to get at the assets of the LLC (except possibly through a "reverse veil piercing" on an alter ego theory - which we will discuss more about later).   

The limitation of the LLC Asset Protection is that a Judgment Creditor can tie you up on the personal front and you are forced to keep the money or assets in the LLC in order to avoid having the Judgment Creditor get the money or assets.  This scenario can make it difficult for you to operate.  (And using LLC "business" money to pay personal expenses can put LLC assets at risk to attempts by the Judgment Creditor to do a reverse veil piercing).  

So, bottom line is that an LLC is a good first step to Personal Asset Protection.  Coupling the LLC with a Personal Asset Protection Trust is far better (we will discuss the Personal Asset Protection Trust hereinbelow).  

C.  Using A Family Limited Partnership (FLP) Protect Personal Assets

A Family Limited Partnership (FLP), like the LLC, can be a good Personal Asset Protection tool.  The Asset Protection provided by an FLP is essentially the same as the LLC - it is the Charging Order Protection (the non-seizability of the Partnership Interest) that serves as the protection.  


D. The Nevada Asset Protection Trust – the Ultimate Domestic Asset Protection Tool

The Nevada Spendthrift Trust (a/k/a: "Nevada Asset Protection Trust" or "Nevada Wealth Preservation Trust" or "Nevada Domestic Asset Protection Trust" ) is probably the best asset protection tool available in the United States. The Nevada Spendthrift Trust offers unparalleled protection while allowing the individual to retain maximum control. More specifically: 

-    Nevada law allows any individual to create a valid trust whereby he or she is a Trustee (i.e. in control of the assets and has the transactional authority for the trust), he or she is the Beneficiary (i.e. entitled to receive the benefit of trust assets) and the assets are still protected from creditors while in trust; 

-    You need not be a Nevada resident to take advantage of the Nevada Spendthrift Trust Act [requires either that: (1) the trustor/creator of the Trust be a Nevada resident; or (2) the primary assets of the Trust be Nevada based or controlled property; or (3) that a Trustee of the Trust that has the primary administrative function is a Nevada Resident, Nevada Trust Company or Nevada Bank; 

-    Any type of asset (real property, personal property, cash, stocks, bonds, mutual funds, investment accounts, savings accounts, jewelry, valuable collections, family heirlooms, etc.) in any location can be protected by the Nevada Spendthrift Act; 

-    The Nevada Spendthrift Trust Act provides protection from an individual’s own potential judgment creditors (subject to fraudulent transfer restraints).

In addition to the ordinary asset protection concerns of protecting personal assets from personal judgment creditors, the Nevada Spendthrift Trust provides the following added benefits: 

a. Protecting the assets in the event of a future bankruptcy (subject to time limits and fraud constraints – the trust is anticipated and addressed in the most recent bankruptcy law amendments); 

b. Shielding assets in the event of a future marriage; 

c. Estate Planning/Probate Avoidance; and 

d. Ability to have Anonymity/identity concealment (a better alternative than nominees)

It is important to note that the Nevada Legislature determined that it is good public policy to allow individuals to plan in advance to protect their own personal assets, so that individuals don’t have to live in fear that some unforseen event will occur that will subject the individual to liability that may result in the individual losing substantially all of his/her assets. The Nevada Spendthrift Trust, in essence, is a gift from the legislature. Every individual should take advantage of the opportunity to protect all or a portion of their personal wealth. 




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